Stock Views on HDFC, Bajaj Auto, Tata Steel

BNP Paribas on HDFC

BROKING house BNP Paribas Securities has reiterated its ‘buy’ rating on mortgage lender HDFC, but slashed price target to Rs 1,600 from Rs 2,250. “We expect HDFC to continue to enjoy a premium over its banking sector peers with its sticky customer base, better asset quality, a sector leading opex ratio and stable spreads,” the outfit said in a note to clients. “The company guided towards loan growth in the range of 18-20% for FY10. We are factoring for a loan growth of 16% for FY10 and we believe this growth will be more back end loaded in FY10,” the note added.

MERRILL Lynch on Bajaj Auto

MERRILL Lynch has retained its‘neutral’ rating on Bajaj Auto, but raised price target by 11% as it expects the stock’s valuation multiples to expand on improved earnings visibility. “Following positive customer response to XCD 135 cc motorcycle, we have greater confidence for four upcoming launches by September. We raise domestic two-wheeler sales estimates to 1.36 million units in FY10 (5% growth, earlier 5% decline), and retain 5% growth on higher base in FY11,” the Merrill note to clients said.

JP Morgan on Tata Steel

JP Morgan has retained its ‘neutral’ rating on Tata Steel, citing bleak outlook on the sector. “With European steel environment remaining challenging, end demand visibility low, term debt at $10 billion and FY10 (estimated) adjusted net debt equity at 2.3 times, we remain ‘neutral’ on the stock. Working capital release at Corus and the company’s intention to pre pay $450 million at Corus from asset sales at Teesside are key positives and while adjusted FY10E price/book at 0.9 times provides support, we would wait for some improvement in end demand in Europe before stepping in,” the JP Morgan note said.

Stock views on Excel Crop Care, Bank of India, HDFC, Rolta

BNP Paribas on ROLTA

BNP Paribas Securities has maintained its ‘buy’ rating on Rolta and price target of Rs 220, after its acquisition of Piocon, a move that is expected to generate revenues of $100 million over the next three to four years. “While the deal size itself is small and is unlikely to have an immediate material financial impact on Rolta, we are impressed by the company’s current strategic direction,” the foreign bank said in a report. “We remain positive on Rolta because the company stands out within its peer group with its niche market leadership, defensive-end market exposure, and high-revenue visibility,” it added.


Kotak Securities on HDFC

Kotak Securities’ private client research has downgraded HDFC to ‘accumulate’ from buy while trimming its price target to Rs 1,908 from Rs 2,061 earlier, citing the recent slowdown in housing loan demand. “We also believe that HDFC’s disbursement growth is likely to slow down during H2FY09 and FY10 moreover due to present unfavourable macro-economic conditions,” the broking house said in a note, after meeting the management. “Of late, retail demand for real estate that has slowed down significantly is largely on the back of a combined ef-fect of high real estate prices and higher interest rate. This has impacted the real estate affordability for retail consumers. Correction in property prices would be essential to boost real estate demand going forward,” it added.


India Infoline on BANK OF INDIA

India Infoline has upgraded Bank of India’s rating to ‘add’, citing higher earnings visibility and relative stability in turbulent times. “Bank of India is confident of maintaining high-quality earnings growth with a strong focus on key operating ratios. BoI expects loan growth of 24% in FY09, driven by strong demand for rupee funds by domestic corporates,” the broking outfit said. “The cut in deposit rates, along with a BPLR cut, should enable it to keep its net interest margins intact. Its AFS investment portfolio would benefit from falling bond yields, and we expect its fee income to grow in sync with loan growth,” it added.


LKP Shares on EXCEL CROP CARE


LKP Shares has rated Excel Crop Care a ‘buy’, with a 12-month price target of Rs 180. “We expect ECCL to grow its revenues and profits at a CAGR (compounded annual growth rate) of 43% and 26% over FY07-09 and the stock trading at 3 times FY09E (estimated) earnings, with a dividend yield of 6% is a good bet in the agrochemical space,” the broking house said in a client note. “We believe that the farm loan waiver would raise the farmers’ ability to purchase agrochemicals, which coupled with growing food needs and expectations of higher productivity from crops would push the demand for agrochemicals in India,” it added.

Stock Views on Shree Cement, Tata Motors, Larsen & Toubro, Reliance Power

BNP Paribas on RELIANCE POWER

BNP Paribas has reiterated its ‘reduce’ rating on Reliance Power while lowering its price target from the earlier Rs 136 to Rs 105, as it feels that the company does not have any operating income and there is a likelihood of some projects getting delayed. “The company currently has no operating income and only generates interest on the cash it raised in its IPO last year,” says a report. BNP Paribas also feels that Reliance Power’s Sasan and Chitrangi projects could get delayed, as Tata Power has filed a petition in the Delhi High Court. It estimates an upside of Rs 15 per share to the target price, if RPL’s gas dispute with RIL is resolved at $5.20/ mmbtu. “We also estimate an upside of Rs 37 per share, if RPL is able to execute both Sasan and Chitrangi projects,” it adds.

Motilal Oswal on LARSEN & TOUBRO

Motilal Oswal has maintained a ‘neutral’ rating on Larsen & Toubro while lowering its capex guidance for the company. It feels that going forward, there are increased possibilities of execution delays. “Standalone capex guidance for FY09 has been reduced to Rs 15 billion now, from earlier Rs 20 billion,” says a report. “During 1HFY09, the capex stood at Rs 8 billion, indicating that 2HFY09 capex has been cut sharply,” it added. The brokerage also feels that while there have been no meaningful delays till date, there is a probability of execution challenges for segments like metals/minerals (8-9% of order book), airports (9-11%+) and real estate (6%). It expects L&T to report consolidated EPS of Rs 52.6 per share for FY09 (up 34% Y-o-Y), Rs 57.4 per share in FY10 (up 9% Y-o-Y) and Rs 60.8 per share in FY11 (up 6% Y-o-Y).

HDFC Securities on TATA MOTORS

HDFC Securities has maintained its ‘sell’ rating on Tata Motors due to various factors, including demand slowdown, lack of credit financing and failure of the company’s rights issue. “The demand is slowing down drastically. Lack of credit financing, coupled with high interest rates are forcing customers to postpone purchases hitting among others Tata Motors,” says a report. To align production with demand, the company had temporarily shut down its Jamshedpur, Pune and Lucknow plants, it adds. The brokerage also feels that the failure of the rights issue has reflected badly on Tata Motor’s credibility and ability to raise money on its own. We believe the JLR acquisition will continue to be an overhang on Tata Motors’ stock, it says. The profitability of Tata Motor’s subsidiaries in Q2 FY09 was also very disappointing, it notes

India Infoline on SHREE CEMENT

India Infoline has retained its ‘add’ rating on Shree Cement with a target price of Rs 587 on expectations of higher volume and lower decline in cement prices. “The company has nine mtpa cement production capacity and plans to increase it to 10 mtpa by mid-FY10,” says a report. The company also plans to set up a 35MW WHR-based and around 40MW petcoke-fired power plant, it adds. The company, according to the report, recorded strong volume growth (>30% Y-o-Y) in the quarter ended December 2008 that enabled it to offer bigger discounts than its peers. The company is expanding its cement capacity by adding another line (Unit VII) at Ras — scheduled to start production by mid-FY10, says the report. The company is trading at EV/tonne of $41 and does not reflect the company’s

Stock views on Cummins, Sun Pharma, Infosys

CITIGROUP on INFOSYS TECH
CITIGROUP has cut its price target for Infosys to Rs 1,350 from Rs 1,420 while maintaining a ‘buy’ rating, citing likely disappointments in the company’s third, or October-December, quarter earnings on Monday. “We have lowered our FY10-11E estimates by 6% on the back on lower volume/pricing assumptions and cross-currency impact in Q3,” the bank said in a report. “With a likely disappointment in Q3 numbers and further EPS cuts, the stock could underperform near term,” it added.


BNP Paribas on SUN PHARMA

BNP Paribas has maintained its ‘buy’ rating on Sun Pharma and also its price target of Rs 1,695 after the company initiated an out-of-court settlement with the promoters of Taro to acquire it. “We believe that an increase in consideration by 16-23% for the residual stake doesn’t alter the appeal of the Taro transaction for Sun Pharma,” the bank said in a report. BNP expects Taro’s acquisition to be accretive to Sun’s earnings per share and have a “15% positive impact” on FY10 earnings. “Taro’s operational history has been marred by accounting issues and cash flow problems. Despite these problems, we believe Taro represents a significant synergistic opportunity for Sun Pharma,” it added.


Kotak Securities on CUMMINS

Kotak Securities’ private client research has maintained its ‘accumulate’ rating on Cummins, citing likely strong earnings in the October-December quarter, or the third quarter. But the brokerage expects the growth to taper off in the fourth quarter. “Due to factors like product price hikes, some softening of material prices, depreciation in rupee and continuing value engineering exercises, we believe there is a strong case for margin expansion in Q3 FY09,” Kotak said in a report.

Stock views on Bharati Shipyard, Nitin Fire Protection, GAIL India

BNP Paribas on GAIL INDIA

BNP Paribas has initiated coverage on GAIL India with a ‘reduce’ rating, as it expects gas transmission prices to fall thereby affecting the company’s core business segments. “We initiate research coverage on GAIL India with reduce rating to factor in a steep decline in profitability of GAIL’s petrochemicals, LPG and liquid hydrocarbons (LPG/LHC) segments in the wake of a cyclical downturn,” says a brokerage report. These business segments together accounted for 51.8% of GAIL’s FY08 EBITDA, adds the report. BNP Paribas expects EBITDA of petrochemicals and LPG/LHC segments to decline by 50.5% and 10.7%, respectively, in FY08-10. The bearish outlook is also based on the fact that the Petroleum and Natural Gas Regulatory Board (PNGRB) has proposed to use the depreciated asset value of GAIL’s existing pipelines to determine tariffs. Gas transmission tariffs will likely fall on new regulation, notes the report. The brokerage also feels that RIL’s ongoing legal dispute over the supply and pricing of gas could delay the onset of gas supplies beyond its estimate of April 2009.


Karvy Stock Broking on NITIN FIRE PROTECTION

Karvy Stock Broking has maintained a ‘buy’ rating on Nitin Fire Protection even while lowering the target price by 33.60% to Rs 239. “We are downgrading our earnings estimates by 4% and 11.5% for FY09 and FY10, respectively. We expect the company’s fire protection safety and security business to be impacted on account of slowdown in the construction sector and corporate capex plans,” says a report. The brokerage has also lowered its revenue estimates from the company’s high pressure cylinder business on account of lowerthan-expected capacity utilisation at the Vizag plant. “We are reducing our sales estimates for the cylinder business by 8.1% and 15% to Rs 1,508 million and Rs 2,036 million for FY09E and FY10E, respectively,” says the report. On consolidated basis, Karvy has lowered its sales estimates by 5.5% for FY09E and 12.6% for FY10E.


Prabhudas Lilladher on BHARATI SHIPYARD

Prabhudas Lilladher has retained a ‘buy’ rating on Bharati Shipyard after the company’s wholly-owned subsidiaries lent Rs 2-2.5 billion to Great Offshore’s promoters against a pledge of 14% equity. According to the brokerage, although there would not be any P/L implication on the company, as the interest rate on the loaned amount is at commercial terms, Bharati Shipyard “would have to leverage further in order to fund its capex”.

Stock Views on GAIL, HDFC, Ananth Raj Industries

HSBC GLOBAL RESEARCH on ANANT RAJ INDUSTRIES

HSBC Global Research initiates an ‘underweight’ rating on Anant Raj Industries (ARIL) with a target price of Rs 50, which is at a 50% discount to ’09E NAV of Rs 100. ARILs owns residential land parcels in upmarket locations in Delhi, and has four hotel properties near Delhi airport. Its land bank of 61 million square feet has been aggregated at a cheap value of Rs 200 per share. Execution has faltered, despite a healthy balance sheet. With consistent capital raising, ARIL has maintained a healthy balance sheet with marginal debt and has a net cash position of Rs 500 crore. Also, 90% of its land is paid for, so the carrying cost of land on its balance sheet is not a cause for concern. Despite these factors, its execution track record does not inspire confidence. There have been delays on its major projects, and only two projects have been delivered in the past 24 months. ARIL faces the daunting task of increasing the pace of execution in the wake of strong cash availability. However, with the demand outlook getting bleaker, HSBC expects there to be limited room for ARIL to accelerate its project development.


GOLDMAN SACHS on HDFC

GOLDMAN Sachs reiterates ‘buy’ rating on HDFC, but it has cut the 12-month target price to Rs 1,890 from Rs 2,070. Investors have expressed concerns about HDFC’s ability to meet growth expectations due to two reasons: 1) Lending spreads can be narrowed by higher borrowing costs due to tighter credit conditions and HDFC’s reliance on wholesale funding; and 2) Non-performing assets on HDFC’s exposure to property developers can rise due to a marked downturn in the property market. However, Goldman Sachs feels HDFC has sufficient financing flexibility, including the ability to raise deposits and fund growth if conditions warrant. HDFC’s investment appeal rests on three factors: 1) Demonstrated resilience in its earnings through market cycles; 2) The long-term potential for growth in an underpenetrated market, and the strong and long-term sustainable return metrics that HDFC currently enjoys; and 3) A well-capitalised balance sheet that should enable fund growth through internal accruals without requiring additional equity capital over the next 3-5 years. Goldman Sachs values the core mortgage business using the mid-point of Camelot-derived P/BV and its ex-growth value. HDFC currently trades at or below historical P/BV and P/E multiples, making the valuation appear attractive.


BNP PARIBAS on GAIL

BNP Paribas initiates research coverage on Gail, India’s largest gas transmission utility, with a ‘reduce’ rating and a target price of Rs 176 per share. The low estimates factor in a steep decline in profitability of Gail’s petrochemicals, LPG and liquid hydrocarbons segments in the wake of a cyclical downturn. These business segments together accounted for 51.8% of Gail’s FY08 EBITDA. Gas transmission tariffs are likely to fall on new regulation. The Petroleum and Natural Gas Regulatory Board (PNGRB) proposes to use the depreciated asset value of Gail’s existing pipelines to determine tariffs. Starting FY10, BNP Paribas will model tariffs of Gail’s existing pipelines as per PNGRB’s proposals. BNP Paribas uses a sum-of-the-parts approach to arrive at target price of Rs 176 per share. It values the petrochemicals and LPG/LHC business segments at 10-year trough EV/EBITDA multiple of 2.6x, Gail’s unlisted investments at book value, and its investments in listed securities at 30% discount to current market prices.

Srock views on MTNL, Titan Industries, SIEMENS, Yes Bank, Colgate Palmolive, GREAT Offshore

HSBC on COLGATE PALMOLIVE

HSBC has initiated an ‘overweight’ rating on Colgate-Palmolive with a potential return of 25.8%. The oral care category in India has a penetration rate of 78% and a per-capita usage of toothpaste, which is half that of China. Increased usage and penetration, along with a shift from toothpowder to toothpaste, are likely to drive volume growth of 8-9% for the next several years. Colgate is the undisputed market leader in all the sub-categories of oral care and has a diversified product portfolio covering all price points and an excellent distribution network. Colgate is poised for steady growth. It has increased gross margins by changing its raw material mix, reducing complexity, and increasing in-sourcing with minimal price increases, protecting volume growth. HSBC values Colgate on a price-earnings (P/E) and a direct cash flow (DCF) basis. The P/E valuation, at 18x FY10E earnings per share (EPS), comes to Rs 424. The target price of Rs 470 is an average of the two. Colgate is currently trading at a 12-month forward P/E of 17.1x, the lowest forward P/E in three-and-a-half years.


DEUTSCHE BANK on YES BANK

DEUTSCHE Bank believes that Yes Bank’s recent severe underperformance relative to the market and the banking index has factored in most of the concerns about its asset quality, margins and fee income growth and has upgraded the stock to ‘hold’. However, it has reduced the target price to Rs 55 and cut earnings by 11-17% for FY09-11. The major concerns are: asset quality due to large exposure to mid-corporate group and commercial real estate; margins due to weak funding franchise; and a sharp slowdown in non-interest income growth due to relatively high dependence on capital market-linked activities. The target price of Rs 55 is based on a single-stage Gordon growth model with a price-to-book value (P/BV) of 1.0x, arrived by using a blended return on equity (RoE) of 15.5%. The key upside risk to Deutsche Bank’s hypothesis is a sharp recovery in loan growth accompanied by a rise in margins. The key downside risks are higher-than-expected deterioration in asset quality and stagnation of branch network due to unavailability of branch licenses, which can pose a challenge for Yes Bank.


JP MORGAN on SIEMENS

SIEMENS reported a standalone net profit of Rs 225 crore in Q4, substantially below the estimate of Rs 360 crore. Operating profit margin was down 300 basis points (bps) year-on-year (y-o-y) to 12.5%. Markto-market (MTM) losses on short positions in foreign exchange (forex) derivatives contracts, in a quarter where the rupee depreciated 10% visà-vis the dollar, can be responsible for a large part of the margin decline. With the underlying hedged being of longer maturity, JP Morgan can expect gains on the underlying in coming quarters. The performance of the company’s subsidiaries is a drag on results: Siemens’ FY08 consolidated revenue of Rs 9,680 crore was in line with estimates, while its profit after tax (PAT) of Rs 470 crore was 30% below full-year estimates. The company’s 100%-owned principal subsidiary, SISL, performed poorly in FY08. Siemens’ standalone revenue growth from continuing operations is higher at 15%, but power (which contributes 49% to the topline), posted a growth of 3.2% y-o-y. There has been little incremental visibility in the power segment, as the Qatar order has neared completion. All other segments have shown strong revenue growth.

JM FINANCIAL on TITAN INDUSTRIES


TITAN benefits from the presence of extremely strong brands in largely unorganised segments. The domestic jewellery market is pegged at Rs 75,000 crore, less than 5% of which is ‘branded’ and Titan controls 65% thereof. With extremely low penetration level, there is huge scope for the ‘democratisation of luxury’ in India. With Titan now partially linking jewellery-making charges to gold value, profitability may not be so susceptible to the movement in gold prices, going forward. In the watches segment, JM has projected a compounded annual growth rate (CAGR) of 13% in sales between FY08 and FY11E. Viewed in the context of India being an attractive retail market (more so in the luxury segment, in which India is still at the nascent stage), Titan emerges superior among retail players in terms of profitability, as well as return on capital employed (30%-plus). Also, y-o-y generation of free cash flow is a source of distinct advantage for Titan. In light of a slowing economy where future growth potential is a key concern, the P/E to growth (PEG) method of valuation appropriately recognises future growth rate and adjusts the P/E multiple accordingly.


CITIGROUP on GREAT OFFSHORE

GREAT Offshore has announced a combined contract for two of its assets — Malaviya Thirty Three (a heavy lift vessel) and Gal Ross Sea (an anchor handling tug) — for a total of $22 million for one year in the Khafji oilfields of Saudi Aramco. The assets have been contracted out at a combined day rate of $63,000. Although the exact day-rate split between the two assets is not known, they estimate the heavy lift vessel to fetch ~ $55,000. This contract is a key positive, indicating strength in the offshore services segment, as opposed to the downtrend witnessed in segments such as dry bulk. Citigroup retains a ‘buy’ rating on the stock, given a relatively stable business profile (75% of revenues from ONGC) and good earnings visibility (average contract durations ~2-2.5 years), making it less exposed to a cyclical downturn in the offshore cycle. Though spot rates have declined 10- 15%, the company has only five of its 41 vessels operating on spot. Q3 should see sequential growth in revenues and profits on account of commencement of new contracts, as well as higher dry-docking expenses in Q2.


BNP PARIBAS on MTNL

BNP Paribas initiates coverage on Mahanagar Telephone Nigam (MTNL) with a ‘reduce’ rating and target price of Rs 55, based on cash per share of Rs 39 and a core business valuation of Rs 16 at 2.5x FY09 EBITDA. Historically, MTNL traded close to its book value, but the valuation is now converging towards its cash per share as its return on equity (RoE) has declined to 3.3%, well below its cost of capital. Moreover, one-fourth of its book value is amount recoverable from the Department of Telecom (DoT), which is unconfirmed and outstanding for several years. Cash per share will dip to Rs 39 from Rs 61. BNP believes MTNL faces significant revenue risk as its wire-line segment, which contributes 70% of its revenue, will continue to decline due to subscriber loss and reduction in tariffs. MTNL will find it extremely difficult to protect its wireless market share in competition with more efficient private operators, which are reducing tariffs, leveraging scale economies, coupled with superior customer service.

Stock Views on CIPLA, Gujarat State Petronet, Praj Industries, Jaiprakash Associates,

BRICS Securities on CIPLA

BRICS Securities has initiated coverage on Cipla with a ‘buy’ rating. The brokerage expects Cipla to maintain its leadership position in the Indian formulation market in coming quarters. “Thirdquarter results came in as a positive surprise. Revenue (up 22% Y-o-Y) was in line and recurring net profits (up 28% Y-o-Y) were above our expectations, led by falling raw material prices. This, coupled with growing presence in export markets, should enable the company to report a 16% earnings growth in the next fiscal,” a Brics Securities report said. Amidst concerns like reclusive management and volatile past earnings, Cipla’s continues to perform well. The company is the top-most player in this segment, and has a strong portfolio in the chronic therapy segment. Given its strong domestic share and continued strength in overseas generics business, we recommend a buy on the stock, the report added.

BNP Paribas on GUJARAT STATE PETRO

BNP Paribas has assigned a ‘buy’ rating on Gujarat State Petronet on expectations of an upside in gas transmission volumes and higher return on capital employed (RoCE) as a result of new new tariff regulations. “We believe that GSPL is a long-term play on rising natural gas supplies, with the next fiscal (FY11) being the inflexion year. We expect Gujarat State Petronet’s gas volumes to increase 26.8% between FY08 and FY11 driven by its contracts with RIL and Torrent Power,” a BNP Paribas report said. Petroleum and Natural Gas Regulatory Board’s (PNGRB) new tariff regulations prescribe a pre-tax RoCE of 18.2% for gas transmission utilities. Factoring in the impact of these regulations into our estimates, we expect adjusted pre-tax RoCE to improve to 21.6% in the next fiscal, the report added.

Indiabulls Securities on JAIPRAKASH ASSO

Indiabulls Securities has downgraded Jaiprakash Associates with a ‘sell’ rating, citing weak business environment and highly-leveraged business module. Around 80% of the company’s sales come from businesses that have been adversely impacted by the credit crunch. “The cement, construction, real estate, and hotels segments are facing strong headwinds, as demand has slowed down tremendously and credit availability remains weak. We believe the situation is not likely to improve in the near-to-medium term,” a report said. Considering the current balance sheet position of the company and the funding arrangement related to ongoing expansion plans, the brokerage expects the debtto-equity ratio to increase in coming quarters. Meanwhile, the possibility of further negative news flow cannot be ruled out in coming quarters, especially with regard to real estate, cement, and construction sectors, the report added.

Finquest Securities on PRAJ INDUSTRIES

Finquest Securities believes that Praj Industries could immensely benefit from the mandate adopted by EU Parliament of 10% bio-fuels blending in all transport fuels by 2020. Such a move by the European Union will entail additional 12-14 billion litres capacity for ethanol, a Finquest report said. The brokerage has rated Praj Industries an ‘outperformer’. “The US has preponed its renewable fuel targets of 11 billion gallons from 2012 to 2009. This move is expected to support capacity build-ups. We expect net revenue to grow by 10% in FY10 as a result of the demand from European Union and the US,” the report added. Amongst key negatives, the order book of Praj Industries declined by 19% Q-o-Q, due to delay in decision-making and credit problems at the clients end as well as some previous orders turning non-executable.

Stock Views on Shiv-Vani Oil& Gas,

BNP PARIBAS on Shiv-Vani Oil& Gas

BNP Paribas maintains ‘buy’ rating on Shiv-Vani Oil & Gas, while reducing the target price from Rs 800 to Rs 522 on higher borrowing costs and multiple contractions. The company’s global peers trade at a forward P/E of 10.5x, compared to Shiv-Vani’s 8.4x (based on FY10 EPS estimates). Global peers are likely to expand at 23% from FY08-FY10, while Shiv-Vani is set to grow 58%. BNP Paribas believes oil service companies will continue to see strength in their core businesses, despite weak sentiment surrounding crude. Shiv-Vani’s receivables rose by 158% to Rs 276 crore, which comprised 48% of its FY08 revenue. Since over 85% of Shiv-Vani’s revenue comes from ONGC, this raises concerns on the company’s working capital management. BNP Paribas believes Shiv-Vani will need to raise cash to fund its working capital needs in the near term and hence, will see an increase in its cost of borrowing.

EDELWEISS on Opto Circuits

EDELWEISS maintains ‘buy’ recommendation on Opto Circuits. The company cancelled the proposed $100-million acquisition of an European company as the demanded price was not justifiable from an economic value perspective. Over the past few years, Opto has created strategic and shareholder-value by focusing on inorganic opportunity for growth, be it in the Advanced Micronic Devices acquisition in ’01, Palco Labs and the thermometer division of HUL in ’02, Mediaid in ’03, EuroCor in ’05, or the recent Criticare Systems acquisition in ’08. This shows the management’s focus on value creation. After the recent correction in stock price, the valuations offer a good buying opportunity. Opto has traded at a premium to the market due to high growth, healthy margins and upside from potential acquisitions. But with the recent market fall and overhang of large ownership by FIIs, the stock price has corrected more-than-warranted, making it attractive.

Stock Views on Mahindra & Mahindra, Dabur, Reliance Power

Merrill Lynch on Mahindra & Mahindra

WHILE Merrill Lynch has reiterated its ‘underperform’ rating on Mahindra & Mahindra (M&M), it has revised the price target to Rs 536 from Rs 499 due to additional value of listed subsidiaries, and a 4% lower dilution on assumed non-conversion of foreign currency convertible bonds (FCCBs). Merrill Lynch has the following concerns: Unexciting overall prospects of core business, restricted by highly competitive and margineroding utility vehicles segment, as well as substantial investments, which will dilute earnings and return parameters. Over the next three years, capital outlay is estimated at Rs 9,000 crore on an existing base of Rs 7,000 crore. Around 50% of the company’s investments are expected to be related to acquisitions/joint ventures, possibly in new forays, or where the management’s capability is yet to be proven, for example two-wheelers, auto parts etc. Standalone capital expenditure (capex) surge will sharply increase fixed overheads, and therefore, drag down mediumterm profitability, as well as the return ratio.

HSBC on Dabur

HSBC has assigned an ‘overweight’ rating to Dabur India with a price target of Rs 110. The recent sluggishness in the share price can be attributed to the slowdown in growth for foods from 20%+ earlier to around 15% in the past few quarters. However, since the integration with the consumer care division (CCD) has been completed, and supply chain issues have been sorted out, the foods segment is set to return to 20%+ growth in the next quarter. This may be the trigger that the market seeks to re-rate the stock. HSBC has valued Dabur at 21x FY10E earnings per share (EPS) of Rs 5.25 to get a target price of Rs 110. Dabur has averaged a 12-month forward price-earnings (P/E) multiple of 24.6x over the past two years with minimum and maximum P/Es of 17.1x and 29.9x, respectively. The stock is currently trading at 21.1x FY09E EPS. Given its robust business model, which is well-diversified over a large number of segments, with brands targeted at each category of consumers, Dabur is currently trading below its deserved multiple.

BNP Paribas on Reliance Power

BNP Paribas has initiated coverage on Reliance Power by assigning a ‘reduce’ rating. Reliance Power is a power utility at an early stage of development with revenue expected to start only in FY10, when its first power project becomes operational. The company has an ambitious plan to become the second-largest power generator in India by adding ~31 gigawatts (gw) of capacity by FY16. However, the company faces significant headwinds as only one project has attained financial closure. Further, 66% of the land required for its projects is yet to be acquired. Its hydroelectric projects are in very early stages of development with the risk of being shelved. BNP Paribas believes that Reliance Power will find it difficult to prevent project cost escalations on rising equipment and construction costs. Rising interest rates and a global credit crunch can increase debt costs above the company’s estimates.

Srock Views on Pantaloon Retail, Bartronics, HDIL

MORGAN Stanley on Pantaloon Retail

MORGAN Stanley advises investors to accumulate Pantaloon Retail’s stock at current levels. The company reported stock selection guide (SSG) for value and lifestyle retailing at 14.1% and 8.2% year-on-year, respectively, in August. The average SSG for value retailing for the past three months is 12.2%, while for lifestyle retailing it is 11.5%. There were no store additions in home retail and SSG stood at 25.8% in August. Sales for the value and lifestyle retailing segments grew by 49% and 38% y-o-y, respectively. The ‘5 Din Mahabachat’ from August 13-17 generated sales of Rs 200 crore, and nearly 60 lakh footfalls were generated in Big Bazaar and Food Bazaar stores. The top six cities in revenue terms accounted for nearly 60% of the total ‘5 Din Mahabachat’ sales. The stock is trading at 14x FY09E earnings, adjusting for value of its subsidiaries Future Capital, Home Solutions, Future Media and Future Bazaar. Morgan Stanley expects Pantaloon to deliver an EPS CAGR of 56% for the next five years.

HDFC Securities on Bartronics

HDFC Securities initiates coverage on Bartronics India with a ‘buy’ rating. With 90% and 95% market share in smart card and radio frequency identification (RFID) segments, respectively, the company offers all automatic identification & data capture (AIDC) solutions under one roof. Its early entry into smart card manufacturing will help it to retain its dominance in the area. Bartronics is the only manufacturer of smart cards in the country. Its smart card capacity has already been booked for the next two years. It also has the capability to provide end-to-end AIDC solutions, which will help it to expand its order book and topline. The company’s revenues and profits are expected to witness a CAGR of 72% and 78% over FY08-FY10E. At the current market price, it is trading at 6.5x and 3.8x its FY09E and FY10E forward EPS, respectively. HDFC Securities has arrived at a discounted cash flow (DCF)-based target price of Rs 234 — an upside of 53% from current levels. While the bull case target price is Rs 339 (upside of 122%), the bear case target price is Rs 147 (downside of 4%) from current levels.

BNP Paribas on HDIL

BNP Paribas initiates coverage on Housing Development & Infrastructure (HDIL) with a counter-consensus ‘reduce’ rating. HDIL focuses on the lucrative Mumbai slum rehabilitation segment, which is characterised by high margins and high entry barriers. Slum rehabilitation projects account for 34.5% of its land bank. However, funding constraints and delays due to state elections next year are likely to slow its progress. The company’s target of rehabilitating 15,000 slum tenements annually starting in FY09 is ambitious, since the best it has done so far is 3,000 tenements annually. BNP Paribas’ channel checks with slum dwellers indicate that the company is likely to face several roadblocks, especially in the Mumbai airport slum redevelopment project. HDIL’s earnings stream is highly volatile and there are significant risks in achieving the estimates of the market, which is yet to factor in execution delays. BNP Paribas would like to gain more comfort on the company’s ability to scale up its operations and execution before turning positive.

Stock views on Andra Bank, Honda Motors

Kotak Securities on Andra Bank - TARGET PRICE: RS 81

Kotak Securities has initiated coverage on Andhra Bank with an ‘accumulate’ recommendation, saying the bank has one of the lowest NPAs (non-performing assets) in the industry and hence is better placed vis-à-vis its peers. The fact that the bank has been focusing on high yielding segments like agriculture, infrastructure, SMEs and retail has helped it deliver higher margins as compared to other public sector banks, says Kotak. “The bank’s gross NPA came down from 5.04% in FY04 to 1.07% in FY08 and net NPA declined from 0.93% to 0.17% during the same period,” the Kotak Securities note to clients said. The brokerage expects the bank to post an earnings growth of 1.1% CAGR (compound annual growth rate) for FY08-10E (estimated) as a result of moderate loan growth and lower noninterest income. However, says the note, the noninterest income would contribute less in the banks total income due to subdued equity market as well as increase in bond yields with corresponding fall in bond prices.

BNP Paribas on Honda Motors - TARGET PRICE: RS 884

BNP Paribas has upgraded its rating on two-wheeler major Hero Honda from ‘reduce’ to ‘buy’. The brokerage believes that potential upside on volume and earnings upgrades may act as positive catalysts for the stock. The year-to-date (YTD) growth in retail sales for Hero Honda, says the brokerage, were up 18% y-o-y (year-on-year) versus industry growth of 9.8% and going forward too, the volume growth looks healthy. “We don’t see any risk to our volume estimate, because our FY09 volume growth of 12.9% implies a 10% growth over the next eight months compared to a 17% growth achieved in the first four,” BNP Baribas note said in its note to clients. The brokerage has increased the FY09 EPS (earnings per share) and FY10 EPS estimates by 6.9% and 9.1% respectively. It expects the company’s net margins to be protected by fiscal benefits. “We do not see any threat to Hero Hondas’s net margins because we expect the aggregate 3-3.5% price increase (taken in two parts) coupled with lower tax rate due to fiscal benefits from the Haridwar plant to offset input cost pressure on the EBITDA line,” the note added.